Learn how homeowners can plan to minimize the stress of having two homes.
Want to sell your house and buy another one? Your overall financial position will determine how you can complete this transaction.
In an ideal scenario, you put your home up for sale, find a buyer and sign a contract to close in 60 days. You then go out searching for a new home, find one, sign a contract to buy that home and schedule your closing to purchase your new home for the same day as you sell your existing home. You move out in the morning and in to your new home in the afternoon.
These sell-then-buy transactions - especially in today's challenging real estate market - rarely work out as planned. Many home sellers are unable to sell their home in a timely fashion, so buying a new home before selling your existing home could put a home owner at risk for carrying two mortgages or not being able to close on a new transaction and losing a down payment deposit.
Some borrowers can choose the order of buying and selling. First, a borrower needs enough assets to make the down payment on their new home without having to use the equity in their existing residence. Second, the borrower needs to have enough income to cover the monthly payment of the existing home and the new home.
Many move-up home buyers used to just say that they would be renting their existing residence if they could not sell it and lenders would accept that explanation as long as they saw the house was on the market for sale. But Fannie Mae, Freddie Mac and FHA recently imposed stricter guidelines about counting rental income: unless you have at least 30% equity in your existing home and a tenant who has signed a lease and paid a security deposit, you will not be able to use rental income on an existing home.
If you do not have 30% equity in your home and you do not qualify to carry the monthly costs of both homes then your only option is to sell your home before you purchase a new home. If you are concerned about having a place to go once you sell your home, sellers can request a condition in their sales contract that they have a specified period of time to find a new home. If the seller fails to find a new home to buy, the seller can cancel the contract. (Consult your attorney if you plan to add this to your sales contract).
Even if you are successful enough to plan out your transaction so that you can close on your sale and buy your new home on the same day, you may still need to make a down payment for the purchase of your new home. If you are relying upon the equity in your home for your down payment, you may have a problem if you do not have a source for your down payment from savings. Sellers just like yourself will expect a down payment as part of your contract. You may be able to negotiate a small down payment to match what you have available in savings.
Do not forget that when you are selling then buying that you may have other sellers and buyers as well. For example, the buyer of your home may be selling their home to buy yours, and the seller of the home you are buying may need to close on a new home in order to be able to sell to you and move out of their home. It is important to know all of the potential contingencies in a transaction to reduce the amount of time you will spend living in a motel with your belongings on a moving truck.
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